Lennar: Anything But Just A Simple Homebuilder

It's working on orders for new homes, which soared 40% in the quarter ended in May, and more following as the industry awakens from a long sleep.

Miami-based Lennar is one of the nation's top homebuilders with operations in 18 states and an industry-leading market value of $6 billion.

A Lennar home in San Jose, Calif. Not only is homebuilding rebounding, but the company's financial-instrument business is humming. AP View Enlarged Image

But it's Lennar's behind-the-scenes work in complex real estate finance and services that's given it extra clout and firepower and sparked intense interest.

It comes from Lennar's newest segment, Rialto Investments, which acquires and monetizes distressed loans and securities.

The business also provides advisory services, due diligence, workouts and asset management services.

Rialto is in some ways similar to LNR Property, a business Lennar spun off in the late 1990s. A former LNR executive, Jeff Krasnoff, oversees Rialto and its staff of 200.

"The biggest difference that sets Lennar apart from its peers is Rialto," said Michael Kim, managing director and partner at CRT Capital Group. "It provides them with a competitive advantage."

That advantage comes from visibility into "transaction activity going on across the country" as Rialto deals with distressed loans with exposure to residential and commercial assets.

Toll Bros. (TOL) has a somewhat similar, but smaller version in its Gibraltar Capital and Asset Management subsidiary.

For Sale Sign

LNR is reportedly for sale by current owners Cerberus Capital Management, Vornado Real Trust (VNO) and iStar Financial (SFI), among others. And Rialto, ironically, is said to be one of the bidders. Lennar did not respond to an interview request.

Whatever the outcome, LNR's sale would give more insight into Rialto's valuation.

Rialto has been particularly helpful in Lennar's pursuit of good land deals.

"We are fishing in a different pond," Lennar's President Richard Beckwitt told analysts in a second-quarter conference call. "We have created many deep-rooted relationships with banks and other local sellers that provide us access to deals that are not on the open market."

And more than just land, Rialto has given the company expertise to buy assets that will turn into land, such as Community Development District bonds, bank notes and mortgages, he added. "This provides us with a constant stream of high-margin opportunities."

So Rialto's relatively weak contribution to Lennar's earnings in the last quarter may be excused, as some analysts have done. And in any event, management says it's a temporary blip.

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